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I'm going to university in a few months and was looking to invest any weekly surplus (£50-75) from my student loan into an index fund.

Most funds appreciate in value by about 7% a year on average after costs, so over the course of a 39 week academic year, I should get approximately 2.514%[1] profit on what I've invested.

By the time the next year starts, this should increase to 4.263%[2], and, thus, by the time my course finishes 4 years later, I would have 15.73%[3] more than I invested. Obviously, I'm not expecting to beat the interest, but this should hopefully reduce its impact.

Unfortunately, there's a big problem: Every single brokerage I have come across (in the UK) charges a flat fee rather than a percentage (usually that's a good thing, but paying a £12 fee when I'm only investing £75 is a bit much) and, worse yet, none of them allow me to buy 'fractional' shares.

I know Vanguard and some other firms tend to reinvest dividends by buying fractional shares, but these firms only seem to offer managed accounts (with considerable minimum investments and fees in excess of 0.22% of the entire account's balance)

Are there any brokerages that offer trades with a fee that's a percentage of the amount invested and offer 'fractional' shares? Is the cost of making more frequent investments likely to outweigh the compound interest advantage[4]?


[1]: Assuming the 7% figure comes as a result of compound interest, we can take the weekly interest (w) to be the 52nd root of 1.07. This number can then be used as the common ratio of a geometric series with 39 terms. The sum of these terms is given by (1 - w39)/(1-w), so the effective interest is then ((1 - w39)/(1-w))/39 - 1 = 0.02514

[2]: Using our value of 1.02514 from the previous calculation, we can calculate the profit over the remaining 13 weeks of the year by using the compound interest formula: 1.02514 * w13 - 1 = 0.04263

[3]: At a rate of 4.263% per year, an investment of £1 a week yields £40.66. This will earn 7% interest per year, so it too forms a geometric series, and thus the sum of the first 4 terms is given by 40.66 * (1 - 1.074)/(1-0.7) = 180.539. So an investment of £1 * 39 * 4 = £156 yields £180.539 for a profit of £24.539 or 15.73%

[4]: Making 13 investments a year instead of 39 would yield a profit of 15.58%, making 3 a year would yield 14.83%, and investing the money at the end of each academic year would yield 12.89%. This makes me think investing every three weeks may be the optimal strategy to reduce the need for 'fractional' shares (£225 can buy three FTSE-100 tracking ETFs at the moment), whilst also minimizing fees if paying a fixed rate.

closed as off-topic by Nathan L, Ganesh Sittampalam May 3 '18 at 14:24

This question appears to be off-topic. The users who voted to close gave this specific reason:

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    Why the downvote? I'd be happy to improve this question if necessary, but I would need to know what it is that needs improving... – DividedByZero May 3 '18 at 2:11
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    I think your question confuses shares (stocks of individual companies, including investment trusts & ETFs) and funds (collective investments e.g. unit trusts & OEICs, which invest in a portfolio of shares). The fees of £10-12 per trade on most brokerages refers to buying shares. If you are buying funds (question states you're looking at an index fund), with most brokerages (e.g. HL, in AakashM’s answer) there is no flat fee per trade. You buy units in the fund—most online brokers discount the initial charge to 0%—then pay ongoing platform fees (~0.5%). – marktristan May 3 '18 at 8:21
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    Separately, I think a lot of investors would take issue with the phrase “Most funds appreciate in value by about 7% a year on average after costs”, and using this to predict short term gains. This may be a long term average for the stock market as a whole, but (a) you'll find a lot of variance between funds and (b) this is averaged over a long time frame; you will find a lot more volatility from year to year. Your assumptions of profit over 1, 2 or 4 years, unless they're purely for illustration of the charges/fees query, should be carefully examined, or at least contextualised. – marktristan May 3 '18 at 9:02
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    the 7% is over the long term ie 50-100 years with a time frame of 3-4 years you may get less especially as we are near the end of a bull market – Neuromancer May 3 '18 at 9:32
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    I didn't downvote but as asking about what broker to use is specifically offtopic, it's not surprising that the question atttracted a downvote. – richardb May 3 '18 at 9:55
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Many UK investment firms offer low-cost stocks and shares ISAs, a vehicle which looks ideal for your purposes. For example, *Hargreaves Lansdown's stocks and shares ISA has no charges for dealing, a minimum regular investment of £25/month, and charges of at most 0.45% pa for the account itself. Low-cost ETFs, such as the Vanguard FTSE 100 index ETF, add charges of as little as 0.06% pa

You're not going to be able to avoid fees entirely, but do the maths: if you put in £67/week for 39 weeks over a year, your average balance is £1306, 0.51% pa comes to £6.66. I think you can probably afford that.

* my only affiliation is as a customer

  • Thanks for your answer, but wouldn't the 0.51% apply to all the assets in my account? That would come to £30.85 on average over 4 years (and would increase with time, but I could probably switch accounts when I get to that point). Still affordable, but a far cry from £6.66 :) – DividedByZero May 4 '18 at 22:33
  • According to Hargreaves Lansdown's website there is no cost for investing in funds, but shares and ETFs both cost £11.95 per deal: hl.co.uk/investment-services/isa/… – DividedByZero May 4 '18 at 23:18
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For the purposes of your question ( investing micro-amounts, ETFs and being from the UK), I would strongly advise you to check out a robo-advisor like Moneyfarm or Etfmatic.

Both are available in the UK, both offer you the chance to create custom portfolios from minimum amounts of initial investments(let alone minimum investing experience) and also offer low fixed percentage fees for their services.

That being said, two things to note, consider your time-frame for these investments because exposure to bonds while less attractive in returns also means the invested amount is less likely to have suffered a short/mid-term depreciation. Also by keeping the deposits weekly you get to cost-average your positions in general and even allocate on different portfolios, which you can have separately on those (ie one heavier on stocks and another with greater exposure to bonds) depending on the current situation.

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I don't know of any brokerages that offer a percentage fee for small amounts invested, and yes, I believe that the fees for making small investment might cut too deep into your interest.

A great app for micro investing is Acorns. I started using it about three years ago just to test it out, and it works great. It costs $1US per month for accounts less than $5000, which is a little steep at the low end, but it has a lot of different, but simple, features. You can start with a deposit of any amount you want (maybe at least $5 to start), and it gets invested in an IRA fund, based on your long-term/short-term goal, or desired risk level. You can also do "round-ups" which round any purchases you make on a linked credit/debit card to $1, and then every time you reach $5 it pulls that amount from your checking account (but that's a little off topic from your question).

  • Thanks for answering. The service is actually free for university (college) students, but, unfortunately, it is only available in the US. – DividedByZero May 3 '18 at 2:35
  • I think Nutmeg is another one that serves the UK. – Craig May 3 '18 at 2:56

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